An elegant solution

Well we’ve been working on it for some time and today Jeanette released our updated climate change policy framework. There is also the slideshow available.

At the heart of the policy framework is an elegant solution to the problem of how best to put a price on greenhouse emissions and a revenue recycling mechanism. Basically the policy links the internal price for greenhouse emissions to the price set globally under the Kyoto protocol, which is effectively a global cap and trade system.

Under the policy, if you bring fossil fuels into the economy (whether by importing or mining) then you need to purchase the Kyoto units to cover the emissions from those fuels and then pass those units on to the Government. The electricity generators have to purchase the Kyoto units to cover their operations and pass them on [addendum – ie the carbon credits to cover the emissions from fossil fuels used by electricity generators aren’t purchased by the importer but by the electricty generator].

In agriculture, the processors like Fonterra are required to buy the Kyoto units to cover the increase in emissions over 1990 levels resulting from their cows and pass them onto the Government.

In forestry, the Kyoto credits generated from post-1990 forests are distributed amongst the whole sector to encourage the sector to hang onto their forests (and plant more).

The result is that there is a price on carbon in the energy sector, there is a price on carbon at the margins in the agriculture sector, and carbon credits in forestry. The price is set by the international Kyoto market. Plus the Government has Kyoto units in excess of the total greenhouse emissions of NZ as well as saving $600m that has been set aside to pay for Kyoto units to cover our emissions.

Some of these units can be used to provide partial protection for energy intensive sectors that would simply go overseas if they were made to pay full price, because currently some countries still aren’t putting a price on carbon (ie Oz and US) .

Some of the surplus units can be sold and, along with the $600m, the revenue used to invest in measures to reduce emissions and provide relief for those less able to adjust – measures such as public transport, progressive pricing of electricity and retrofitting insulation to old houses.

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16 thoughts on “An elegant solution”

1. Companies who first bring fossil fuel into the NZ economy, whether by mining it here or importing it, will be required to purchase and transfer to government enough Kyoto-compliant emissions units to cover the carbon that is released when that fuel is burned. …
2. The exception to the above (3.a.1) would be for the fuel that is sold to electricity companies. This fuel would be exempt because Electricity companies will themselves be required to purchase Kyoto compliant emission units, and transfer these to government.

so the electricity companies buy carbon credits for the fuel they burn, and the fuel sellers buy carbon credits for the fuel they sell, except what they sell to electricity companies. So all fuel is paid for once.

But it does seem needlessly complicated. Why don’t the fuel sellers pay for carbon credits for all the fuel, and the government not directly gharge the electricity companies at all. Is it to stop the electricity companies stockpiling fuel?

On the ‘leckky front: the carbon cost will fall heavily on the likes of Genesis, but lightly on Meridian. Will this mean that Meridian’s juice will be significantly cheaper? – I doubt it, the difference in generation costs will go to the shareholders. Remind me who that is…?

i/s. regarding coal, Huntly get their coal from overseas I understand so it’s not going to affect them.

regarding gas, the electricity generator contracts are pretty long term i think so not so llikely to be affected by an increase in the price of the domestic gas – not to mention that the same firms are often both gas users for generation and domestic gas distributors.

Russel: No, I understood that part, and it was clear enough in the primary document. The problem is that the electricity sector is not the sole market for natural gas or coal. Natural gas and coal providers will therefore be required to purchase credits to cover their non-electricity sales (a big chunk of the market for gas, and an even bigger one for coal). And this will affect the price paid not just by the non-electricity sector, but by the electricity sector as well.

If the aim is to advantage renewable generation, exactly the same effect is gained by dropping the exception and having a consistent point of obligation at the fuel supply. The price of fossil fuels for generation will rise (just as for transport), renewables will become more profitable, and generators will have an incentive to switch. So why try and be complicated about it?

Russel said: This will have some intereting effects on the electricity market such as bigger profits for renewable generators because generally the marginal cost of electricity generation at any one point sets the price for the whole market.

Yep – Meridian will love this policy. Solid Energy will hate it. It definitely sends the right signals.

Under the policy, Mobil pays for the carbon credits on the oil they import. They then no doubt pass this on to consumers at the petrol pump (maybe 5c/L at $30 tonne CO2).

And Contact pays for the carbon credits to cover the emissions from the gas they import to burn in their power station. And they will probably pass this one to electricity consumers (don’t have the numbers in front of me). This will have some interesting effects on the electricity market such as bigger profits for renewable generators because generally the marginal cost of electricity generation at any one point sets the price for the whole market.

Looking again at your post, I think the fault is mine because when I summarised the policy I didn’t make it clear enough that the importers of the fuel for electricity generators won’t have to buy the credits, the generators themselves will.

Luke: unfortunately, that is exactly what it will do. Once you establish a marginal price (for fossil fuel companies) of production / importation / whatever, it will be incorporated into the market price, even when they don’t have to pay it. It’s the same effect which saw electricity prices rise to include the cost of carbon in Europe, even though the generators were grandparented the permits. So, those fossil fuels they buy will already include the carbon cost – (which is BTW enough to get them to “consider the net effect of generation”; to the extent they don’t attract a carbon price, renewables will be favoured and generators will shift their generation patterns).

There are international trades – Chch City Council received Kyoto AAU for a landfill gas project, which they sold to the Dutch, while European companies buy Kyoto credits to feed into the ETS – but its all ad hoc at the moment. It’s just not big enough or reliable enough to underpin our policy. And its unlikely to be, unless some other much larger countries run their own emissions trading scheme with devolved Kyoto credit.

Stuey – I agree, I was looking at it on the internal forum earlier and I liked what I saw. I like it even better now. Think “big blue marble” which is one of the phrases that came out of the space program… but I have no idea why it isn’t a green background. Not worrisome. I am also VERY happy to see this production.

Um, I don’t think the “kludge” does that. It is supposed to be there so the Generators don’t pay twice, once when fuel enters and again for generation. My understanding of it is that this allows Generators to consider the net effect of generation thereby using non-GHG emitting generation to offset GHG emitting generation. I think this is equivalent to giving Generators Carbon credits for non-GHG emitting generation which they could sell to the oil/gas/coal importers.

And I’m no expert on international market for carbon but I thought that there were already New Zealand projects which sold credits international?

Actually, thinking about this, the shift in electricity will have the result of making fossil fuel generators pay twice for their carbon. The cost of carbon will be included in the fossil fuels they buy, and then they’ll have to provide permits on top of that. Is this a bug or a feature?

Urk. That energy sector shifting of the point of obligation for electricity generators is just kludgy. Why not just keep it squarely on the point at which fossil fuels enter the economy? The price will be passed on, the price of different types of generation will therefore incorporate the carbon cost, so why kludge?

I’m also worried about the heavy reliance on an international market which doesn’t yet exist, and the full exposure of emitters to it – not in terms of price, but in terms of their having to interact directly with it. Creating local credits may be a little bit more complicated, and it mires you in arguments about auctions v grandparenting and who gets how much and why, but it means local industries don’t have to go out into the world looking for CDM credit and AAU, while still creating that all-important marginal price.

Lyndon, post 1990 forests are likely to sequester 78m tonnes CO2 in the five years from 2008- 2012 providing forest owners don’t chop lots down (which is why having financial incentives for forest owners is important).

this looks promising. assuming of course that the quantitative aspects are on the mark.

i especially like the fact that liability is positioned where individuals and sme’s dont have a carbon transaction cost (time/measurement/monitoring, etc).

i also like the stance on property rights re post 1990 planting credits. “Kyoto forests only earn credits internationally to the extent that pre-1990 forests are maintained and replanted.” yes yes yes. industry responsibility.

some of the qualitative aspects may (naturally) be problematic. eg. with deforestation liability: “…discourage land use change except where forestry was genuinely a poor use of the land.”